(ix)
any distributions or deemed distributions, including payments made for the benefit of participators of close companies;
(x)
any transaction chargeable under the provisions of the Taxation of Chargeable Gains Act 1992;
(xi)any Taxation arising from the Company ceasing to be a member of the Seller’s group;
(xii) any action which involves, or leads directly or indirectly to, a change of residence of the Company for Tax purposes;
(xiii) any event which had as its main purpose the avoidance of tax;
(xiv) any transaction covered by Part XVII, ICTA 1988 (Tax Avoidance);
(xv) any changes to the share capital of the Company.
15.1 This definition is particularly important if the transaction does not involve Completion Accounts: in this situation, there is a need for the tax covenant to determine the responsibilities for the Tax Liabilities that arise between the Last Accounts and Completion. This is a period when the Buyer is expecting to gain the benefit of the profits, as there should be adequate clauses in place relating to “leakage”, that is the extraction of those profits by the Sellers. However, although the Buyer anticipates the profits from this stub period, he is not in control of the Company, which is still being managed by the Sellers. 15.2 It is entirely equitable that the Buyer should bear the impact of the tax relating to this stub period as he expects to have the benefit of the profits. In broad terms, assuming an effective corporation tax rate of 30%, he expects that the net assets of the Company will increase by some 70% of the trading profits made in the stub period. However, he clearly needs to be protected from any tax liability which may not be proportionate to the trading profits. An example is a tax liability which is not primarily payable by the Company or is not referable to the trading profits generated. 15.3 The theme throughout the negotiation of the tax covenant is that the Buyer requires protection from unexpected Tax Liabilities: the art in which we are all engaged is to capture this elusive concept. This is particularly difficult for this stub period.
15.4 There are the following groups of matters included in the above list:
15.4.1 those transactions which are likely to increase the tax rate so that it is disproportionate to the profits made in the stub period: the first five items listed are focused on this point, trying to identify those matters which might put the rate of tax above the mainstream rate. Examples are PAYE assessed on the Company in respect of people wrongly
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